Strong dinar

When the prime minister of Jordan reminds his audience of his government’s achievements, he rightly points to the rising levels of foreign exchange reserves at the Central Bank of Jordan.

In 1988-89, the Jordan dinar was devalued, de facto, caving to the pressures of low foreign exchange reserves as a result of unfulfilled promises of aid and an overrated dinar.

In 2012, Prime Minister Abdullah Ensour warned against a possible decline of central bank reserves and thus an increased pressure on the dinar’s exchange rate. The result was the dollarisation of about JD1 billion, as people with dinar deposits hedged against such an occurrence.

Foreign reserves boast the unprecedented $14 billion level, in addition to the monetary gold. The net profit on this portfolio is almost 1-1.5 per cent, barely sufficient to cover the central bank’s current expenditures.

The dinar is gaining against major international currencies, such as the euro and the yen. Our imports from the European countries and Japan have increased. A car worth JD25,000 in 2014 is barely worth JD18,000 in 2015 because new 2015 models are worth JD20,000 to JD21,000 only.

The decline in the value of imports from countries whose currencies are depreciating against the Jordanian dinar and the US dollar diminishes government revenues from tariff and sales tax. 

In a way, the government is subsidising imports from EU, Japan and other countries.

As a result of this pattern, the impact on the price level is obvious.

Due to decrease in the prices of fruits and vegetables because of excess supply and decline in exports, and to an appreciating dinar, the rise in the cost of living is negative this year.

Fixing the exchange rate of the Jordanian dinar through pegging it to the US dollar  is denying Jordan an important monetary policy tool. The onus of this policy is falling on interest rates that are rigid and resistant to change.

The end result is a punishment of investors and an encouragement of imports.

The continued decrease in the international prices of oil and food, Jordan’s large import components, helped Jordan’s balance of trade show an improvement which is cushioning the increase in imports as a result of higher exchange rate of the dinar.

The rise in the value of the Jordanian dinar and the rise of its foreign reserves may be counted as blessings under the current circumstances, but they are not without a cost, which the government must consider.

We cannot forge ahead with our policies to encourage investments and curb unemployment when loanable funds are expensive.

Imports are cheaper and government revenues are showing some increase, thus camouflaging the decline in revenues from imports.

What if the Federal Reserve does not heed the IMF’s advise to delay the decision to hike interest rates and abandon gradually quantitative easing?

Would the result be a likely increase in value of the US dollar vis-à-vis other international currencies? 

Are we to consider that a blessing or a blessing-in-disguise?

This is a question for the near future; the government should develop a stance that serves the achievement of the goals envisaged in the just-released 20-25 economic vision.

The writer, a former Royal Court chief and deputy prime minister is a member of Senate. He contributed this article to The Jordan Times.